The Impact of Defense Expenditure on Economic Growth: Panel Data Analysis Based on the Feder Model

Abstract

Defense economics has been studied since the 1960s. It involves researching defense problems from various economic fields. In general we treat defense as public goods in the national economy, but defense economics analyzes the interdependence between defense and the national economy through various routes. Defense economics research is carried out widely in the US and Europe, but it is not yet common in Japan. After the Cold War, the reduction in defense expenditure was regarded as a “peace dividend”. But recently we have been faced with unconventional conflicts such as terrorism. To cope with these conflicts we should consider defense problems from a new point of view and change security measures. Defense economics will be the new tool to consider a country’s defense policy. The purpose of this paper is to analyze the defense–growth relationship. We estimate the economic growth equation based on the Feder model for 109 countries including 30 OECD countries, using panel data over the period between 1995 and 2003. As Feder’s framework shows, we assume that the economy consists of two sectors, the civilian (private) sector and the defense sector. Usually, we think of defense expenditure as a burden on the economy. The main focus of this paper is on verifying how defense expenditure affects economic growth. The empirical results of this paper suggest that defense expenditure has a positive impact on the rate of economic growth in all 109 countries. According to the results, as the defense sector increases, so does economic growth. The defense burden doesn’t have much negative effect on economies in this period.